February 24, 2014

BULLISH TRENDS

BEARISH TRENDS

CHART OF THE DAY: Golden Defense

Golden Defense

“All men can see the tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.”

-Sun Tzu

That’s most likely a familiar quote to any winner in this world – and it should be. Author John Hamm uses it effectively in his intro to chapter 5 of Unusually Excellent (pg 103) in order to link leadership to processes and plans.

As we like to say here @Hedgeye in terms of positioning for new Global Macro Themes, the plan is that the plan is going to change. That’s because real-time prices and market signals do. Our risk management process doesn’t change so much.

Neither did Team Canada’s in this weekend’s Gold medal hockey win at the Olympics. Sure, offense might win shootouts, but defense wins championships. En route to their second consecutive Olympic win, Team Canada shut out both USA and Sweden. It’s really hard to lose if you don’t get scored on (Canada allowed only 3 goals in 6 tournament games). #GoldenDefense

There are obvious ways to apply this mentality to your risk management strategy. In a US stock market that literally went straight up last year, if all you did was not lose money on the short side, you probably won the season for your investors.

Sure, doing crazy stuff (like trading) may look like “short-term” tactics (primarily because they are) but don’t confuse my tactical back-checking with a lack of a longer-term strategy to win championships.

What is your long-term strategy?

Mine is don’t lose money. That’s why how you did in 2000, 2001, 2002, 2008 and 2011 matters. That’s also why most of our Global Macro Themes incorporate what to stay clear of (on both the long and short side) if a big macro theme starts to trend.

Examples?

During #GrowthAccelerating – don’t short high-short interest, high beta, growth stocks that can beat expectations

If you aren’t in the business of shorting things, substitute the word “short” with SELL! Obviously, the other side of “don’t sell” is buy or hold. And I think anyone who has bought and held commodities for the last 3 months is winning YTD too.

Update on our non-consensus 2014 call for #InflationAccelerating:

US Dollar Index is down again this morning and -1.4% in the last 3 months

CRB Commodities Index was up another +2.8% last week and up again this morning to +7.8% YTD

US Consumer Prices (CPI) hit a 4-month headline high of +1.6% year-over-year last week (JAN report)

I know. I know. The government says there’s no inflation, and since they’ve neutered the inflation report so that the headline number can rarely remain above 4% (or below 1%) for long, academics can argue amongst themselves on that.

Reality is that market expectations trade on the rate of change for both GROWTH and INFLATION expectations. And currently the rate of change on both makes our macro call a very easy one to make:

INFLATION: up from its 3yr low of +0.9% y/y CPI in OCT 2013, CPI is going towards 2%, fast, in February

GROWTH: down from its Q313 sequential peak of +4.12% GDP, you’ll probably see a 2% handle in Friday’s GDP report

So, irrespective of your views on how to play Macro Defense, what if?

Inflation doubles (from 1% to 2%)

Growth gets cut in half (from 4% to 2%)

Market #history fans will recall that when inflation slows growth, stock markets get MULTIPLE COMPRESSION. In other words, with the SP500 trading at 16x this year’s #OldWall projection for “earnings”, all you need is 2 points of multiple compression to get you 1638 (14x) at some point this summer. If the “earnings” (and multiple on them) start to fall, it’ll get gnarly out there, faster.

And while I am sure that the “weather will turn” and that some American consumers are dumb enough to go lever themselves up with a few more houses to flip, that doesn’t change the fact that inflation will A) slow real-consumption-growth and B) have a big impact on reported US GDP via a rising “deflator” (note: the deflator, which is subtracted from GDP, hit a 50yr low last yr and is rising).

With Natural Gas (+17.7% last wk to +46.3% YTD) and Coffee price (+19.1% last wk to +50.1% YTD) #InflationAccelerating to 52-week highs last wk, #GrowthSlowing has both Utilities (XLU) and Gold +7% and +11% YTD, respectively. So don’t be short those. Buying and holding them for the last 3 months has been a #GoldenDefense. Being long the American consumer, not so much.

Our immediate-term Macro Risk Ranges are now as follows:

UST 10yr Yield 2.66-2.78% SPX 1

VIX 13.44-16.69 USD 79.81-80.41

Brent Oil 108.54-110.69

Gold 1

Best of luck out there today,

KM

Keith R. McCullough Chief Executive Officer

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02/24/14 07:30 AM EST

THE M3: JUNKET TIES CUT; MACAU VISITORS; JAPAN

THE MACAU METRO MONITOR, FEBRUARY 24, 2014

SANDS, MGM COURT HIGH-STAKES GAMBLERS TO CUT JUNKET TIES Bloomberg

MGM China wants to develop its own customers to help manage risks, said Bowie, the company’s CEO. “The junket model is a very successful model in terms of efficiency but we need to diversify,” he said. “No organization should limit themselves to one geographic market or one business strength. It’s too high risk...Direct VIPs give us considerably higher profit margins.”

Meanwhile, LVS is trying to bypass the middlemen by putting its fleet of private jets and limousines at high-rollers’ disposal, night and day, and comps their stays in suites that run to 8,000 square feet and come with on-call concierges.

Junket operators, led by Suncity Group and Jimei Group, have a steady grip on the industry. Still, some are feeling the pressure. “We are being squeezed (by direct VIPs),” said Yu Yio Hung, who operates a single VIP room at Altira casino. SJM relies entirely on junkets to bring in their VIPs and currently has no plan to change its full reliance. “SJM is comfortable with our junket relationships and with the junket system, which operates legally in Macau,” CEO Ambrose So said.

MACAU VISITOR ARRIVALS DSEC

As the Lunar New Year falls on January this year, visitor arrivals totaled 2,503,609, up by 8% YoY, attributable to an increase in visitors from Mainland China. Mainland visitors totaled 1,689,277, with 832,381 (49% of total) traveling to Macao under the Individual Visit Scheme. The average length of stay of visitors stood at 1.0 day.

LAS VEGAS SANDS' ADELSON READY FOR BIG INVESTMENT IN JAPAN WSJ

"We will spend whatever it takes," said LVS CEO Sheldon Adelson. "Would I put in $10 billion? Yes." Asked whether he would team up with Japanese companies, Adelson said he would be "willing to embrace Japanese partners" if they can hold up their share of the work and adopt a risk-taking mentality. He said he would be interested in opening a resort in either Tokyo or the western Japanese city of Osaka, and that his company would be hiring people in Tokyo to expand its presence.

Proponents of gaming hope Japan will start licensing casinos in 2016 and have at least one in operation before the 2020 Summer Olympics in Tokyo.

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02/24/14 07:10 AM EST

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 24, 2014

As we look at today's setup for the S&P 500, the range is 45 points or 1.81% downside to 1803 and 0.64% upside to 1848.

This Is Not 2013

This note was originally published
at 8am on February 10, 2014 for Hedgeye subscribers.

“Everything is the same, until it is not.”

-Dr. Ellen Langer

Love that quote in chapter 3, “Variability”, in Langer’s #behavioral beauty, Counterclockwise. “People aren’t all that observant, although we think we are. We see what we expect to see, even to the point that we don’t notice things that others clearly do” (pg 33).

Growth investors want to see growth, Gold Bond investors want to see slow-growth, and I want to see Canada win medals at the Olympics. It is what it is – it’s called confirmation bias. And, on some level, most of us have it in us.

(Can you see both women in the picture below?)

So how do we become more objectively observant? How do we force ourselves to see what we don’t want to see? Since I’m talking about markets, I think you know where I wash out on this. Mr. Macro Market usually shows us the way.

Back to the Global Macro Grind…

If you were looking to rekindle 2013’s bull market in US stocks, all you’d have to have done is look at the Dow on Friday. It was +165 points (+1.1%) on the second straight jobs report miss. Everything is the same as last year, right?

Nope. Including Friday’s low-volume rally (the Top 5 Volume days of 2014 have been down days), the Dow and SP500 are down -4.7% and -2.8%, respectively. And they’ll probably be down again today.

This is not 2013 (when inflation was falling and US consumption and employment growth were accelerating). This is 2014 and with #InflationAccelerating again last week, US consumption growth is slowing, faster.

Got Hedgeye Macro Theme #1 for Q114?

US Dollar down -0.8% last week and back below @Hedgeye TREND support of $81.12

CRB Commodities Index (19 commodities) +2.3% last wk to +3.4% YTD

CRB Foodstuffs Index up another +1.1% last wk to +4.5% YTD

In other words, as the US economic data slows, Mr. Macro Market is starting to front-run proactively predictable behavior that Janet Yellen will back off on the tapering and/or change the goal posts again on the Fed’s dual mandate.

Everything that matters in macro happens on the margin, so don’t forget that last year the Fed got incrementally tighter – anything less would be dovish on the margin, including Yellen moving toward what print-money-forever PhDs call “forward rate guidance.”

Not to be confused with something that will work in getting early 2011-style #InflationAccelerating off the US consumer’s back, “forward rate guidance” is basically what Japan did decades ago in telling the world its rates would never go up.

Guess what, they didn’t.

With the 10yr yield on Japanese Government Bonds at 0.60% this morning, the US Treasury 10yr yield of 2.66% has a long way to go; if the USA wants to let an un-elected-central-planning-bureaucrat at the Fed make it like Japan, that is…

Who gets paid on Down Dollar, Down Rates, and #InflationAccelerating again?

Gold and Silver Bulls (+1.9% and +4.3%, respectively last wk to +5% and +2.9% YTD)

Oil Bulls? Yep, that trade ripped on the jobs miss too – Brent Oil +3% last wk, most of it coming on Friday

Forget the lessons of 2011. In response to inflation expectations rising, we need the Fed to tell us we “need more inflation”… so that we can slow real-inflation-adjusted-growth more!

There’s “inequality” in America, so we definitely need to ramp up those prices at the grocery store and at the pump again. Definitely. No question. We need to re-ramp some asset prices and pulverize the purchasing power of the poor.

Captain Keynesian textbook will be quick to read this and say:

But inflation is low, CPI is only 1.2%

And if inflation rises, bond yields will rise …

Because, the government says so

Gotit.

After deflating a small part of the mother of all inflations (Global Inflation’s all-time highs of 2011-2012), anyone who thinks there’s A) no inflation and B) no problem with inflation doubling sequentially from 1% to 2% needs their head examined.

Why? Because the Fed has 0% credibility in fighting real world INFLATION. That’s why over 80% of the movement in the long-end of the yield curve can be explained by rising and falling GROWTH expectations.

In other news this morning:

Dollar Down

Rates Down

US Equity Futures Down

No I didn’t buy the bounce last week (the Russell2000 actually didn’t bounce, it was down another -1.3% to -4% YTD – another growth slowing on the margin signal). Sorry, this is not 2013. Everything is the same until it isn’t.

Early Look

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